Article: How America can Rise Again

When I was growing up, I read an intriguing Amar Chitra Katha story on how Indra, king of heaven, tricked a virtuous asura king into giving up his throne. To cut a long story short, the asura king had achieved high level of virtue and displaced Indra from his heavenly throne. Indra disguised himself as a traveling pilgrim, visited the asura king, gained his confidence and was given a boon. Indra asked for a small thing from the asura king (I think it was authenticity or something like that). The asura king gave it, but he soon found out that his other earthly powers of might, reason and so on all depended on this small thing to exist, and these powers quickly departed him, and soon the asura king weakened and died. Indra returned triumphant to heaven.

What does this have to do with America’s rebound? There has been plenty of confidence in the reinvention of America, it’s taken for granted that America will once again awe the world with its transformation. But is there one small thing where everything hinges on, that becomes the slippery slope of decline?

The excellent Mr James Fallow of Atlantic Monthly tackles this here. Which I’ll quote at length below.

“The main concerns boil down to jobs, debt, military strength, and overall independence. Jobs: Will the rise of other economies mean the decline of opportunities within America, especially for the middle-class jobs that have been the country’s social glue? Debt: Will reliance on borrowed money from abroad further limit the country’s future prosperity, and its freedom of action too? The military: As wealth flows, so inevitably will armed strength. Would an ultimately weaker United States therefore risk a military showdown or intimidation from a rearmed China? And independence in the broadest sense: Would the world respect a threadbare America? Will repressive values rise with an ascendant China—and liberal values sink with a foundering United States? How much will American leaders have to kowtow?

The full details are beyond us here, but the crucial point is that in principle, the United States itself has the power to correct what is wrong in each case.”

So it’s jobs. Once that social glue that middle class jobs provide is gone, a lot of things go too in slow decline. Mr Fallows goes on to describe reforms that are needed in American government needed to adapt to the world.

Here I am reminded by a colleague who came back from many years in Tokyo and his take on Japanese polity’s current inability to adapt to a myriad of small changes (the boiling frog syndrome) unless there is a coherent, overwhelming external shock that pushes Japanese polity to slam the reset button. Commodore Perry’s ships did that, so did the two bombs. And Japanese polity adapted admirably, and then fossilized.

Mr Fallows goes on to state that addressing the menu of problems is within America’s current means. I echo Mr Fallows here when he says American society is fine, but not American polity. The current governing system is simply not able to deliver. 2001 was an admirable time to push the reset button, but it wasn’t used. A fine crisis wasted. Mr Fallows wraps up by saying America should try to reinstitute a multigenerational perspective in planning for the future, and honing its still unmatched strengths. It sounds sensible, it also sounds like muddling through, but perhaps that is the best and more realistic option available.

SocGen’s Worst Case Debt Scenario

I think the first para says it well. “But while we believe the greatest danger is past, we also recognise the price of our salvation has yet to be paid in full.” SocGen’s view on how public debt will swing recovery (or not) in the next five years.

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The Descent of Finance

Will Chimerica end in a divorce? Will the USA be a shadow of its former self?

Niall Ferguson, who co-invented the term Chimerica, asks what the post-Chimerica world might look like in 2013 in the latest HBR issue (full article below). He starts with the US in crisis (high public debt, digesting toxic assets, who wants to buy US bonds?) and then moves on to the economic marriage between the USA and China. Chimerica could end in a divorce if China relies less on exports for growth, resulting in a shift in the balance of power. Yet US global economic power is not undermined as there is no real alternative to the US dollar. Ferguson reiterates a point he made before, that the global economy’s breakdown hurts other nations more than the US. Other countries, including China, will be more weakened by comparison with the collapse in world trade and industrial production. This results in a world of low US growth, and lower growth for other emerging nations. What Pimco has termed ‘the new normal’.

The economic crisis will spill over into politics. In this crisis, US allies (East Asian exporters, newly democratic Eastern Europe) have been hurt more than US rivals. We see new outbreaks of instability in emerging markets that previously looked stable, such as Thailand and Ukraine. The world’s increasing instability reinforces the US as a safe haven. But the US may not want to be global policeman much more, and both new and old unstable spots are left to fester.

It is in this world that Ferguson revisits 2013. It is an assymetric world where everywhere else seems more dangerous and unpredictable than America, where the actual consequences of the crisis are less terrible. The USA’s financial power has been diminished, but its economic power is still stronger than all others.

Power after all, is relative.

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Fifty ways to kill recovery

The tension between state and national interests in the USA does not easily allow for countercyclical measures to work. States will cut back service, jobs and raise taxes during down times to balance their budgets. This amplifies the downturn, instead of mitigating them. Federal money fills in some of the hole now, but it will run out, and it will look worse. Even more important, truly interstate or national projects like high-speed rail, a smart power-grid etc are often held hostage by this tension. There is a need for a genuinely national government to knock heads and pull the nation in one direction, instead of fifty. In the crisis, perhaps we are seeing the birth of such a government today? Full article on the New Yorker by James Surowiecki here.

Book: China’s new place in a world in crisis

Found this through our horizon scanning colleagues, a book by ANU on China’s new place in a world lurching from crisis to crisis. Makes me think of the unfinished conversations we are having on a China-centered Asia (ChiAsia) and the different flows and how the hell Singapore should be placed on these new flows. Anyway, here’s a brief grab on what the book is about:

The world and China’s place in it have been transformed over the past year. The pressures for change have come from the most severe global financial crisis ever. The crisis has accelerated China’s emergence as a great power. But China and its global partners have yet to think or work through the consequences of its new position for the governance of world affairs. China’s New Place in a World in Crisis discusses and provides in-depth analysis of the following questions. How have China’s growth prospects been affected by the global crisis? How will the crisis and China’s response to it impact China’s major domestic issues, such as industrialisation, urbanisation and the reform of the state-owned sector of the economy? How will the crisis and the international community’s response to it affect the rapidly emerging new international order? What will be China’s, and other major developing countries’, new role? Can China and the world find a way of breaking the nexus between economic growth and environmental sustainability — especially on the issue of climate change?

You can download the entire book here.

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Elusive Green Economy

James Fallows of Atlantic Monthly at the Aspen Ideas Conference right now, from his blog a snippet on the US not leading at any of the green technology fields.

On energy, a disturbing factlet. (And obviously not the only disturbing observation on the energy-and-climate front.) I heard three people separately observe that when it comes to future sources of “clean” energy, there is not a single field in which U.S. companies are the technical or market leaders. One person gave an informal ranking of the leaders this way:
Solar-powered electricity (ie, photo-voltaic systems): Norway, Japan, China
Solar-thermal systems (for heating water or buildings) Spain the leader in getting systems deployed
Wind power: Holland, Denmark, China
Geothermal power: nobody
Nuclear power (“clean” in the carbon-footprint sense): France, Japan
CCS, “Carbon capture and sequestration” (stripping out CO2 and burying it): Norway, Australia, Canada.

This person said that his list was rough and ready, and that US firms were in a close second place in some fields. But the main point, he said, is that “American firms are acting as if there is not going to be a vital, profitable, globalized clean-tech industry a decade from now, and as if they don’t care about competing in it.” He had some other more hopeful things to say about how sustained investment could help close the gap. But the list itself was news to me.

And from their latest piece here, excellent read on the elusive green economy. Clean energy, like other utilities, will be succeed or fall with consistent government support/inaction. China is now one of the largest players in clean technology because of government support. So is Germany’s solar play. Unlike Internet start-ups with lower funding costs, energy plays require much larger funds to starup that most VCs cannot afford. Government grants are needed, but that would mean choosing winners. Technology, policy and finance will intertwine, who knows when the breakthrough green tech will emerge from this interplay?

State Capitalism comes of Age

Met up with Ian Bremmer of Eurasia. Some notes below.

- Not a unipolar world, nor a bipolar world, but a non polar world. Absence of global leadership in critical issues e.g. climate change that will fester and stagnate. Such issues are unfixable in the absence of a shock to the system, which triggers a reaction to patch it up. Arguably, the accumulation of imbalances in Chimerica was such as issue, allowed to fester until septic shock set in.

- Globalisation increasingly challenged by state capitalism/SWFs. Not so much deglobalisation, but a mixing of public sector/market. The G20 is a menagerie worse than herding cats, because there are some animals in the menagerie that hate cats, and there’ll be more flareups between nations. Ian wrote an article in Foreign Affairs on the four waves of state capitalism in ‘State Capitalism comes of Age‘, worth a good read.

- The China-US relatonship will move from collaboration to intense competition. The US will bear the bulk of the world’s geo-political burden (Afghanistan, Pakistan …) while China will bear the bulk of the world’s geo-economic burden (developing domestic market in switch away from G3 exports).  I know Thomas PM Barnett talks often the need for the USA us this as a basis to form a grand bargain with China on this, while prodding China to take on more geo-pol burdens, but … but the military guys don’t talk to the economic guys within their government.

Post-crisis: US Savings Culture?

From Michael Pettis, excellent read, on cheap credit forced on Chinese SOEs and making them go stupid in investing (comparison with US conglomerate of the 70s inflating with cheap credit and then the breakup in the 80s, very Pretty Woman) .. and a rise in trade friction, plus a likely cultural shift into savings for the almighty US consumer. Post-crisis world moves deeper into Chasm.

Remaking of Economic Geography post-crisis

R Florida’s maiden post as an Atlantic Monthly correspondent touches on the remaking of the US’ economic geography post-crisis. Specifically, mega-regions and high-speed rails would function as integrated economic units. We already see this in Japan, Korea and recently Taiwan. China herself is launching many high speed rail projects to link the mega-regions along the coast. India herself is starting MRT systems within their large cities, when we see highways, high speed railways within their mega regions, things will start to get interesting. The large, big gap here is mainland ASEAN. A high speed railway connecting Singapore to KL to Bangkok and maybe beyond to Ho Chih Minh and Hanoi will connect China’s mainland and create a large coastal mega region and the possibility of a unified market in the future. The silence on this is deafening, but we can start small and focus just on Singapore to KL to Bangkok. Recent news from KL on YTL Corporation intending to resurface just such a project bears watching, and supporting, from Singapore and Malaysia.

Map: America’s Changing Workforce

Great graphics from the New York Times on immigration changing the USA’s workforce, education, healthcare and other parts of society. This is a long running project by the paper on immigration, worth exploring other entries here.